OPERATIONS MANAGEMENT

OPERATIONS STRATEGY - Lesson 1 (Portioli)

Strategy  def. all the companies, to survive over time, have to build and keep a specific
advantage that differentiate them from competitors. Managing this differential advantage is the
essence of strategy.
Operations: processes through which companies produce and distribute products/services to their
customers.
Operations management is related to the configuration of these processes (operations) in order to
meet the expectations and the needs of the market. Every decision made in this field is extremely
important and has a strong impact on the company because operations are a core element, and
they impact a lot on strategy. Companies can choose the wrong strategy but in the vast majority of
cases, the problem is in the ability to implement it.
Operations are related to how we do things, therefore operations are central to the company’s
business. Most people think that operations are reactive and depend on the market but
Operations should be proactive!!!
Operations should be very simple in order to support company activities.
In the operations, people have to work well, be happy and try to improve continuously their
performance. According to this fact, it’s very important for employees having a good boss that
allow them to grow quicker and better in a positive environment.
Relevant activities are:
 Supply chain  is part of the operations and it’s about a network of companies operate to
deliver products and services
 Marketing and Sales  is not part of the manufacturing operations nonetheless, this function
has its own operations.
We can consider operations looking at three different levels:
 Network of companies level
 Company level
 Operations level (responsibility of the CEO)

Operation Strategy
TRADITIONAL APPROACH
Three different strategic levels:

 Corporate: here we define the overall objectives for the organization such as resources
allocation among different markets and products  (in which business?)
 Business Unit: the overall objectives are here deployed in order to identify specific objects for
each business unit within the company; which are the market’ needs and how to satisfy them
 (how do we compete?)
 Functional: through the budgeting process each unit has allocated specific targets and
resources; it supports the company in satisfying market needs
Therefore, in a traditional context operations are strictly related to marketing and the vision is
extremely technical: a one best way does exist and it depends on the decisions made at the
superior levels, therefore making managerial choices is not fundamental.
As we already said, according to each company
level, different objectives are pursued:
 At Corporate level:
It is important to grasp the higher market
share possible and good financial results
(ROI…)
 At BU level
How can I satisfy market needs?
 At Operation level
Which operations I need to carry out to
provide products/services?

Wrong believes about operations:

 operations are mostly technical

 operative aspects are details
 for the operations system there’s one best way of improvement
(managerial choices are not necessary).

Today this approach is no more possibile because there are forces of change:

Relevant factors that can affect company from outside are (External factor):
 Offer > Demand (it is worth for the majority of the markets especially the western world ones;
instead it is not true of underdeveloped countries  increase of competition)
 Customization: you have to segment the market (tailored products) if you want to reach more
customers as possible
 Globalization: If you want to sell more you have to broaden your market entering in new
market places.
 Speed of technological development: it leads to a rapid spread of the knowledge and
technological competences, the environment is always more and more dynamic and it is
extremely important being able to innovate continuously (i.e. if we consider mobile phones,
they reach the same coverage of television in only ten years).
Factors influencing company’s resources (Internal factors):
 Economical: due to the increase in wealth a lot of people wait for job opportunities that suit
them, leading them to be less who are willing to work in the 3rd turn
 Cultural: education and cultural level  nowadays, companies are looking at least for high
school student
 Social: authority acknowledgement  if someone will ask you to do something you won’t obey
immediately because you don’t like to be commanded; it depends on the country where you
are and its culture.
 Technological innovation
 ICTs: have modified greatly the way of working within a company, impacting on processes

Operations deal with details so it is not easy doing it; if you are working well on your “details”,
you will get competitive advantages otherwise you will lose customers and money.
Operations are under the responsibility of each specific operation manager.

For all these reasons, companies have decided to leave out the traditional approach and to move
to an innovative approach.

STRATEGY

So we have to observe that not all the planned strategies are going to be realized, mainly because
of different factors, forecasted or not, influencing them and of course is possible that the company
will realize something not forecasted.

So having a strategic direction is important, but even more important is the capability of managing
the process of implementation of this strategy, being able to react quickly and effectively.

Deliberate: due to opportunities/threats, we often change our plans.

Emerging: exploiting opportunities that you can find on your way.
Generally, it takes long time to earn competitive advantages.
This could be considered a disadvantage at a first glance but it is for sure also a important
advantage, especially for two main reasons:
1) Your competitors will need time as well as you (even though they could copy and therefore the
time reduces).
2) The long time needed allows you to develop or exploit other opportunities that can emerge
over years.
Why strategy is so important?
To create a sustainable advantage is necessary a significant amount of time as we said before. This
advantage is rarely the result of just one input but it is usually the outcome of many little good
choices such as well-prepared workers.
We should take into consideration the following elements:
 To take many little good choices a clear line is needed  Deliberate strategy
 But, in highly turbulent environment it’s not possible to plan everything in advance
 Emerging strategy

We need to mix and to balance these aspects because not everything can be forecasted
but at the same time, without a guideline, we will smash on something bad!

In the last years also other approaches have been developed such as the:
Innovative Approach
It states that functional strategies can’t be independent one form another, nor they can be the
sequential outcome of the Business strategy; rather VP (value proposition) of main functions have
to communicate and interact to define the strategy at Business Unit and Corporate level.

Integration & Bi-direction

The relationship btw the different business units is bi-directional: functional strategies are not
independent one from each other. Therefore, is not the single business unit that decides and assigns
tasks to the functions, but mostly because of the emerging strategies, is quite common that the
single functions provide solutions and modifications.

I will involve many functions in order to reach

the expected goals.
The objectives of the company are determined
with a mutual collaboration among the
different functions and at a corporate level.
In this way, we will be able to fix realistic
objectives that will produce value for the
company.

“Around a table” we will decide how to compete in the market and which are the performances
that we want to stress and reinforce.
THE VOICE OF THE CUSTOMER
Creating a competitive advantage through operations implies defining the strategic positioning of
the company through performances relevant for the customers.
The main performance we have to consider are divided in the following classes: TIME, PRICE,
QUALITY, FLEXIBILITY and SERVICE.
TIME
Time can be considered according to two dimensions: Delivery speed and Timeliness (they are
different from each other).
Time could be:
 Time to formulate the offer
 Time to confirm the order
 Time to deliver (delivery speed)
 Delivery reliability (Timeliness)

PRICE
It can be the price of the:
 Purchase
 Usage
 Maintenance
 Update/Upgrade/expansion
 Disposal

QUALITY
It can be analyzed through two different aspects:
 Design quality (specifications and characteristics of the product)
How much product satisfies market needs and desires  responsibility of the market and Sales
dep. and of the Research and Development function
 Compliance quality (NB only in field)
How much the product meets the specifications that it is supposed to have  production
responsibility

In this sense, it is important to create a solid relationship between sales dep. and the operations
dep.

I don’t want to promise to the market what I’m not able to provide and so to transfer the issues of
the feasibility on the operation dep. Actually, it often happens that marketing & Sales dep. asks to
the Operations dep. unfeasible requests to meet the market needs.

FLEXIBILITY
Flexibility is the ability to change or react (to stimuli) with a small amount of resource and in a
limited amount of time. Flexibility can be referred to:
 Product
 Customization (it doesn’t mean having a wide offer but providing products/services to
customers according to their specific requests and desires)
 Variety (i.e. it is about how many colors and sizes my company offers)
 Plan (the ability to change the plan increasing the production capacity according to the market
volume demanded)
Talking about Plan we should mention the Frozen Horizon; it can be defined as the time period
according to which I cannot do any change about the order before the delivery date (the
smaller it is the more the company will be flexible).
SERVICE
Service can be measured in many ways. Examples of service measures are Delivery (MTS), Goods
availability at the warehouse (level of inventory), training, technological improvement, after sale
support… so every other aspect that goes beyond the physical good offered.
All the performances just mentioned are strictly related to operations. Of course, it is impossible
to be the best in every aspect but at least, it’s fundamental being aligned with the market ones.

So, we need to align our performance to those ones of the market in order to be competitive!
In fixing the objectives, we need to:
- Look at the market (external analysis), identifying the customers’ needs, competitors actions
and factors that can affect the company,
- Look at the company (internal analysis), investigating and observing the actual configuration of
operations.
From these two analysis, we can understand what we can obtain on the market thanks to the actual
configuration of operations.
Aligning Operations and Market is necessary. If there is a misalignment btw market and operations,
two solutions are possible:
1. Change some internal variables,
2. If internal changes are unlikely (or too expensive) we can work on the positioning.

How we can do this:

1. Analyze customers’ needs,
2. Market positioning,
3. Analysis of competitors’ actions.

DESIRED ACHIEVABLE
PERFOMANCES PERFORMANCES

Stakeholders, of course, will impact on

the company in some way because
they are interested in the results of the
company!!

RECONCILIATION
How can we align us to the market??
Organizations have three strategic levers, the main ones are:

 Technological/plant design choices

 Organizational choices
 Managerial choices

Technological-plant design choices

 Overall production capacity, its division and localization
If you forecast a certain customer’s, demand how much capacity I should install in the system
I.E. 100 u/day  in order to take this decision, I have to consider the following elements:
Entry barriers, face demand variability, economies of scale, volume flexibility, minimum of
increase/decrease, work cost, competences availability, services, response time, closeness to
market…
Division capacity: it’s important to do some reasoning such as it’s better to have small plants in
order to be more flexible or it is better to have a big plant to exploit economies of scale  this
decision depends on the market I’m considering, there is not only one way!
For example reaching economies of scale will be very important for those markets where
competition is based on price (price sensitive) instead small plants are required for very
customized market, in this case it will be useless to exploit economies of scale.
Localization: it is mostly related to work cost, competences and services available but also to
response time (it is a pillar for service activities) and closeness to market.
 Strategic Make or Buy
It can be due to the fact that I want to concentrate my resources on certain businesses, usually
the core ones, instead of others (Example: Fiat, some years ago, sold Magneti Marelli cooling
system, to concentrate its efforts on the development of car engines. The Italian company, in
this way, has arbitrarily decided to lose its competitive advantages derived from its cooling
systems and has tried to earn new competitive advantages from car engines).
 Technologic process and equipment
 Mechanization/automation grade
 Type of plant design of the system: types
of production systems; following this Jobshop
graph we should decide to adopt
different types of production system in Cell
order to satisfy the market demand,
choosing between variety and volume.
Line

 Supply chain configuration (choosing the distribution channel)

Organizational choices
 Competences needed and their management
 Responsibility allocation
 Work organization (Team vs individuals)
 Managing by objectives or process
 Functions integration (Design and manufacturing, Marketing and Planning, …) Notice  the
more you integrate the better is but we don’t have to forget that integration requires
information and so an high resource consumption
 Incentive system (e.g. bonus …)
 Information flows between: among different functions (horizontal), among different
hierarchical levels (vertical)…
 …

Managerial instruments choices – they will affect our performances :

 Definition of the process of operations planning, for example using supportive software such
as MRP,DRP, etc. – of course we need to purchase only the software of which we really need
as they can be very expensive
 Choice of how to meet demand (eg. MTS, ATO, MTO)
 Choice of how to realize the product
 Supply chain coordination systems
 Maintenance managing and realization systems
 Continuous improvement systems, clarifying if the tendency is toward BPR (more radical) or to
continuous improvement
Anyhow, we should analyze performances and determine how far we are from the desired
performances; if we are far to reach them, we have to carry out some corrective actions.
At the same time, we have to remember that the level of our performance don’t have to be driven
only by the market but it has also our duty to find a market that will appreciate our company
performances.

Operations’ strategic role

According to the choices made before, we can define and distinguish between three levels of
operations strategic role:
1. Internally Neutral  operations are not perceived by the company as milestones
2. Externally Neutral  they are not considered as elements of differentiation
(A “best practice” configuration exists and the company will follow it. 85-90% of the
companies
3. Internally supportive  operations are highly taken into consideration, they have to be
aligned to the market and to the company strategy.
4. Externally supportive  operations are not only supporting the company strategy but they are
contributing to ”shape ” the strategy of the company. Operations are a proactive source of
competitive advantage.
ORDER WINNERS AND QUALIFIERS, PERFOMANCES MAP- Lesson 2
(Portioli)
Factors that define the market requests are called “competitive factors”. In order to determine the
relative importance of these factors, we need to distinguish between:
 Order winners (OW) are "those competitive characteristics that cause a firm's customers to
choose that firm's goods and services over those of its competitors. They contribute directly
and significantly, in fact increasing the performance of an order winner means having more
chances to win an order. They are perceived as key factors by customers.
 Order qualifiers (OQ) are necessary for a supplier in order to be taken into consideration in the
purchasing process. Operations have to fulfill some minimum requirements in order to be
considered. If they’re below this standard the order will be lost (in this case we talk of Order
Loser).
We have two decisional moments; the first is “qualifying suppliers” (evaluating suppliers on their
performance). The second moment is about the choice of our supplier/s and it depends, as we
have seen before, on “order winners”.

 Order qualifiers
The origin is the minimum value acceptable
for a specific performance.
If the performance increases, it is not a
competitive advantage because this is not a
strategic performance, but it works as a
threshold.
If the performances will worsen, the number
of orders will be dramatically reduced
(exponentially) because it will be under the
soil.

 Order losers
They are those features that make your
product/service not so appealing to
customers and for these reasons, customers
won’t purchase it.
The optimum strategy is to align the level of
performances to the one of the market. If the
company is not able to meet market
expectations we will have an order loser
  Order winners
Order winners can be considered to be
competitive advantages for the firm and
they usually focus on one rarely more
than two of the following strategic
initiatives: price/cost, quality, delivery
speed, delivery reliability, product design,
flexibility, after-market service, and
image."
The stars drawn in the graph close to
each straight line define the importance
of the performance; the relation is
obvious. The slope of the line depends on the importance of the performance; as we can see
from the graph, the more important is the performance the more will be the tilt associated to
the line

How can we define a performance as “qualifier” or “order winner”?

We have to define a set of representative customers and a set of significant orders (behavior).
Then, we will try to understand what customers want from us.
Go and see what customers are and want, if they will complain always about quality, it will mean
they care a lot of it; it’ simple! Look at orders and customers’ behavior to understand what they
really concern.
i. First of all, we need to analyze marketing data (more in details market analysis, survey,
interviews, etc.) but they cost a lot therefore we cannot use them in an improper way
ii. We also need to analyze a set of significant order made by past customers in order to
understand their behavior.
Through these two analysis, we can distinguish between OW and OQ.
Then we have to:

 Identify, between the set of qualifiers, if there is any loser, and if there is, try to think of some
recovery plan
 Weight the different OW using a ranking system (e.g., distributing 100 points among them
according to their importance, attributing them a number of stars…) in order to make
differences clear.

Having done this, we can distinguish between different customers’ categories and segments such
as:
 Market segmentation (which market segments?)
We have also to segment market into different segments in order to search the most suitable
ones for my market proposal and to identify the differences among segments in terms of
preferred and required performances. I have to target a group of customers that is
 characterized by having homogeneous needs (segment). Of course, it is possible that a
customer can be part of different groups (overlapping) (promotional VS standard packing).
 Operations point of view, from a marketing viewpoint we can have different segments because
marketing is focusing on different characteristics and requirements.
 We know that required performances can change a lot according to each segment.

Evolution in time
We have to know that this process is not static but it
is subjected to an evolution over time: OW can
become OQ and vice versa.
This evolution can be:
 Market driven: the market has some specific
requirements and therefore it focuses only on
some performances
 Company driven: the company itself decides to focus only on some performances (change of
strategy)
This allows to the operation dep. to understand where the company has to focus its efforts in
order to be more competitive and attractive for its customers.
In order to show this behavior we can use:

Map of performances
In order to study the market and the other competitors, the manager can develop a map of
performances that highlights the differences in terms of time, price, quality, flexibility and service
between our competitors and us.
In this way, I can decide in a more
conscious way which performances I have
to improve, which ones I can overlook or
let equal.
In the picture, on the right, the red line
represents the market, the green one my
company while the remaining the
competitors.
We could have a performance that is excessive respect to our competitors; we will leave it as it is if
it will take us some advantages otherwise we could reduce it at the expense of some other ones.
Considering the evolution of performances
in time.
Why the green company does not change
the service level according to the market
need.
Many reasons could be: they didn’t have
the antennas in the market, they had the
data but they weren’t able to recognize the
growing importance of service or perhaps, due to the poor power of customer and service dep.
they weren’t able to ask further resources to improve its capability.
In doing these considerations we have to look attentively at:
 Importance of the performance
 The gap between the market and your company has to be eliminated (or highly reduced) in
order to balance investments correctly (if we are above market expectations we should
reduce investments on that specific performance and reinforce another one that is currently
below market expectations and needs to be aligned)
 Competitive positioning
 Difficulties and resource used in order to achieve the desired result

Project selection matrix (gain–pain matrix)

The best position you can reach is High/Low
box, actually in this way we will obtain high
results with low efforts but of course, it is
difficult to reach.
Non-linearity
If we consider the long-term perspective, the OW
chart will not be linear so we have to consider two
different behaviors:

 The red curve describes the situation when

you have a big change; after some time the
sensitivity towards these improvements will
progressively reduce and they will become
qualifiers.
 The green curve is a performance that, if it is improved doing high investments, after a certain
level will provide you a relevant advantage (i.e. the lasting of a notebook battery; if I had a
battery that lasted for 12, instead of the average one of 3/4 hours, many people would buy it).

Introduction to Service and Service Processes - Lesson 3 (Portioli)

Causes of service growth are:
 Social and demographic trend (evolution of needs  see Maslow’s hierarchy of needs,
welfare, entertainment)
 ICT (services to distribution and communication)
 Globalization (transport, tourism and services for industrial companies)
 Outsourcing (services for industrial companies)
Global manufactory means globalization of service and outsourcing; companies are, increasingly,
focusing on their core activities and outsource the non-core ones.
For example: P & G ,few years ago, decided to outsource its service competence and so thus, the
company has reduced its added value.
From a GDP aspect, services are increasing but from a physical point of view, they are quite
similar.

Maslow’s Hierarchy of needs

With increasing wealth, we will buy more and
satisfy more needs  Maslow hierarchy
It states that needs are divided into different
levels and to achieve the needs of the upper
levels, I need to accomplish before those ones of
the lower levels.

What is the difference between a product and a service?

Service
 Intangibility
 Not storable / delivered and consumed at the same time
 Not 2 service units equal to each other
 Difficult to assess (service price/evaluation of delivery service costs and service performance)
 They are more Capital intensive (Not labor service)
 Easier to change (less fixed costs / shorter service life)

I am not interested to make a distinction between a product and a service, what it is important is
to understand which are the characteristics of product/service that affect a particular business.

Service unique characteristics:

 Intangibility: creative advertising, no patent protection, importance of reputation, difficulties
in monitoring quality before the service delivery
The more the intangible asset is relevant the more you have to add something different in
terms of operations; you can advertise, communicate (feelings…).
Mister // Alibi // Services
 Customer participation in the service process: attention to facility design but opportunities for
co-production. It does not happen always, for instance: during car maintenance service you do
not participate to this (this service is treated like a product). An opposite example is the
following one where a luxury boat producer invites its clients to participate to the construction
of their boats.
 In this way, they can modify the boat according to their wants and so have a tailored product.
In this way, you sell the way you do things not just a product; for this company the customers
is within their operations.
 Simultaneity: opportunities for personal selling, interaction creates customer perceptions of
quality. It is very important in order to have a prompt feedback of your service (What’s right?
What’s wrong?). If you control the process during its delivery, you will have a better output
 Perishability: you cannot cumulate inventories, opportunity loss of idle capacity, need to
match supply with demand; the more you can store the more you will be aligned with the
market; nonetheless, for certain services you cannot reduce variability but just manage it
(especially for these services that depend on customers’ behavior…).
 Heterogeneity: customer participation in delivery process results in variability. If a great part of
the variability is due to the customers, we have to design a service that takes it into account
and can adapt on it (due to the different possible dynamics)
Service classification
The process is one key element to define a service delivery system.
It can be classified:
 Visible VS not Visible to the customer
 Volume Vs Variety
 Processing: people, objects, information
Visible vs. not visible services:
Processes have many differences that are the basis of the competitive advantages.
Interaction with customer (Front Office Vs Back Office)
The customer receives an outcome and lives an experience that is defined by a certain level of
personalization, speed (the service has to be delivered promptly), flexibility, courtesy and
competence.
Basing on the relative importance of outcome and experience, we can distinguish between:
Back-Office focused operations
This causes that the service provided to customers is based
either on the outcome either on the experience of the
customer. The experience part is less important while the
outcome is essential.
Ex. Postal service
Front-office focused operations
This is mainly based on the experience between the customer
and the server. Therefore, when you deliver the service you must design
carefully how the service experience will be delivered. Therefore,
customer management is essential.
When the outcome is taken for granted and not differentiated
(commodity), more attention is given to the experience.
Ex. Cinema, Entertainment park…
Centralization
You can centralize part of the processes; for instance, I can address to the back office the initial
part of the process and then to the front office the last part of the process, exploiting economies
of scale if it is possible…
Notice that decoupling back-office activities
allows to centralize them and even store
them.
Pros of centralization:
 No interruptions (efficiency)
 Fast decrease along the experience curve
 Specialization of activities (thanks to volume), this also permits to hire people with a lot of
competences and having also non-specialized employees to be assigned to general tasks
 Lower manpower cost
 Possibility to follow personal attitudes
 Less volume variability
 Thanks to high volume:
 Economies of scale
 Automation, with advantages in terms of cost and quality
If you centralize your processes, you can increase your efficiency because you won’t have
interruptions due to the interactions with customers.
Cons of centralization:
 Possible GAP with the Front-office (you don’t have…)
 Activities overlapping
 Longer lead times
 Greater rigidity
 Inability to keep a product base approach, therefore switching to an activity based approach
Impact on strategic performances:
Time
 Decoupling increases the lead times (however the customer could be more sensible to the
time he/she uses)
Price (cost)
 Front-Office saturation: personnel is usually sized on values near to the peak. If Back-office is
decoupled, during the non peak periods it’s possible to work on Back-office and so reduce the
need of resources (increase saturation); Decoupling B.O. and F.O. activities, you will saturate
more resources.
Quality
 Decoupling require a pick up and release, this can introduce errors
 Decoupling can allow specific solutions that increase quality (e.g. automation)
Flexibility
 Decoupling makes accommodating changes, and out of standard situations, more difficult
Volumes to handle vs Variety offered
Volume-Variety Matrix
As we have already seen for manufacturing
companies, also for services we can
introduce a classification based on a matrix
that puts in relations level of variety and
volume.
 Variety is the number of different
services performed using the same
resources
 Volume is the number of services
performed with the resources.

Mass services

 High volume of transactions for each server/unit

 Standardized process and procedures for each server/unit
 Short interaction with the customer (focus on back-office)
 Attention to productivity
 Attention to conformance
 Automation/ informative systems
 Competences embedded in the system (people need only to run the system; the knowledge is
within to the system not in the operators; they just follow the procedures)
 Process innovation (innovation is in the process)

Professional service
In this case, an interaction is required; one example is the psychotherapist. You go to a
professional to solve a problem you have. You buy the competences of the professionals.
Their features are:
 Low volume of transactions for server/unit
 Not well defined/standard process
 Longer interaction with the customer
 Attention to provide solutions
 Product innovation
 People’s competences and abilities are a critical asset

Professional service shops

Professional service shops are the development of the professional services as dimension
increases. The trade-off is that the more volume increases the more you will lose the possibility to
customize your services.
 Request of increasing efficiency without losing customization
 Request of knowledge sharing (embedded in the system); many consultant groups ask you to
structure the knowledge you acquire in order to make it available to the others consultants
within the company.
 Development of a “house style”, so that different customers can recognize the approach
 Decreasing of the discretion degree, setting rules (e.g. for what concerns price setting)
 Creation of semi-professional roles (they have some knowledge but they are not key expertise
area) and roles dedicated to the interaction with the customer.
 Development of roles dedicated to interactions with customer in order to better understand
what they’re looking for.

Mass service shops

Mass service shops are the development of mass services (low variety / high volume) towards a
broader service offer.
For sure, we can say the broader is the variety the less is the control!
Its characteristics are:
 Increasing of mix offered (trying not to lose the strict control over the process)
 Increasing of the front office discretion degree (trying to not worsen conformance)
 The front office people need to develop the ability to understand customer’s needs (in order
to offer the right service)
You want to avoid losing control on your processes. Example: McDonalds decreases its offer to
customers through menus. In fact, we have few combinations that are economically convenient to
customers and also the menu can be just medium or all big... you can have different sizes but it’s
not advantageous.

Utilization
What use can be done of this classification?
 Thanks to this classification we can:
o Verify inner coherence: coherence between levers
o Verify external coherence: with the values offered on the market
o Compare different units/ businesses
o Manage change  my operation has to change according to the offer

Understanding variety
To better understand the level of variety that the
process has to guarantee, we can also distinguish
between different types of service requests:
 Runners: requests that always need the same
operations/ activities. Often foreseeable, and in
remarkable volumes; opportunities for
automating at least a part of the processes.
 Repeaters: requests that refer to known activities
but clustered in a different way. This type of
activities are rarer, but predictable (in
medium/low volume
 Strangers: requests that need the design of new activities. Often little foreseeable. They are
the expectations: NOT expected occurrences.

Where to focus actions

Service projects: projects are all different from each others. They focus both on back and front
office but the large part of the work is done in the back office.
Service factory: high volumes, always the same service hence the focus is completely on the back
office that allows you to reach competitive advantage.
Service partnership: consultant activities. The project goes well if the customer goes well. You
don’t need back office because you work together with your customers and this is the key factor
for those activities.
Diy service: ???

A call centre in-calls profile

Is variability higher in service than for a product??
The main difference between variability in services and in manufacturing companies is the time
frame!! In services variability is related to minutes, not to months or years!!

Variability and Uncertainty

 Variability is the gap between the actual value and the average value
 Uncertainty is the gap between the actual value and the expected value
With good forecasts, it is not a big deal. In addition, segmenting and clustering could be a strategy
for reducing uncertainty (e.g. in a hospital, a surgeon could have a different surgery-time if
compared to another, and therefore we can adjust the forecasts knowing in advance which
surgeon is going to operate  In our example, I need to understand what are the variables that
drive the time, when I’ll find them I will reduce remarkably uncertainty).

I could have high variability but low uncertainty and vice-versa; if you have a system that is flexible
enough to answer to changes…

Not explained variability causes uncertainty

Corollary: uncertainty can be reduced by explaining it, thus reducing it to variability.
Variability conceals phenomena
It’s important that you are able to observe the impact of each change you do in your system. To
each action should correspond a change (reaction), right away.
We have 2 types of variability:
 Determined by the company  control/remove it
 Outer variability  limit the effect
Pareto  20% of the product/services generate the 80% of variability;
If it is not possible to remove variability, at least, isolate it! In order not to let it disturb all the
other factors.
In this way, you can understand better where the problem is and try to solve it!
Managing service variability:
 In a service system variability has to be managed at the front office
 The greater the variability, the greater the front office’s competences and discretion needed
 A system based on command and control is very inefficient (and often even ineffective) in
managing variability.

At the front office, we have large variety of requests (customers can do very different types of
requests). I have to lead the customer demand to a small number of request in order to reduce
variability (cono ad imbuto)

Ontario packaging case

Question for Monday morning workgroup on the Ontario packaging case  What are the keys for
each performance? What are the drivers of each performance? How does the new investment will
change the drivers and consequently, the performances of the company?

Main performances:

Main performance Organization Management

Delivery speed 60% utilization (it Lot size (small lot size)
affects mainly on D.S.) mainly
Delivery reliability Quick set up time
Plant flexibility Lot size (small lot size)

If the capacity is above your demand it allows you to reach easily delivery speed. Non-saturation is
essential to face demand variability.
Having a slack capacity to accommodate demand is a cost that we can decide to support (it’s like
advertising costs…) and it is a strategic choice!
If my set up time is very small (few time needed to change the layer) my queues will be very short.
Low set up time allows me to have small lot size. The latter helps me in decreasing the delivery
speed. The larger the batch size is the longer is the response time. These are the keys points.
A higher level of utilization will impact negatively (reducing delivery speed) on the actual
performance and so the risk could be to worsen the company position in the current market.
Increasing utilization, we will lose slack capacity that allows us to absorb demand variation and to
maintain low delivery speed that is critical for the market.
We can reduce saturation only if we were able to reduce demand variability.
Buying the new machineries will bring down your delivery speed due to the high utilization
achieved It is a bad idea!!
I have to pay the fixed costs with the actual market and reach new markets to recover variable
costs and gain some extra profits.
One point is that they could negotiate the payback time.

Strategic Capacity Management - Lesson 4 (Portioli)

The strategic management of capacity is a choice that has to be considered in different moments
in fact, choices related to capacity and its division are not static.
More in details, it is important to define:
Characteristics of Capacity strategies

 Timing of change (the right timing for change)

 Magnitude of change
 Attention paid to the transitory
Key issues (not complete list):
In order to understand when change becomes
necessary and how we can change, we have to
evaluate some key issues:

 Lead time (LT) to complete the change

 Flexibility to change
 Economies of scale
 Forecast of demand trend
 Forecasts uncertainty (fulfillment / demand)
 Competitors’ behavior
 Requested service level / customer’s behavior
In particular, we may have elements influencing capacity coming from the market (external) or
internal elements, related to the resources owned and their management (LOOK THE PICTURE
ABOVE).

Consider economies of scale

Of course we have to consider economies of scale:
Consider Risk
Taking into consideration risk, we have to remember that:

 All values are estimates,

 To get more precise data there is a cost (sometimes it is even impossible),
 Sensitive analysis (sensitivity analysis is the study of how the uncertainty in the output of
a mathematical model or system (numerical or otherwise) can be apportioned to different
sources of uncertainty in its inputs) helps us in identifying key elements
 A certain degree of uncertainty is unavoidable, it is therefore necessary to be prepared for it.
 Data are not only estimate, in fact can be influenced and affected by something done by the
company itself (e.g. sales forecast depend also on marketing actions),
 Passions is a key element for success.

Consider transient

 It is impossible to get all benefits from the outset.

 Performances during the transient period can be permanently disrupted.
 It may require a long time to make the conditions to change.
 In case there are not the right conditions it may be better to postpone change.
 A work Breakdown Structure (WBS) and a project planning allows to anticipate (and avoid)
problems.
Keep in mind that you will invest now, but you will reach the advantages of the change later (your
revenues won’t increase so soon)

Timing of change: Leading and Lagging strategies

We could apply two different strategies:

 Leading strategy: timing the

introduction of capacity in such a way
that there is always sufficient capacity
to meet forecast demand (we
anticipate the demand – Red line).
We anticipate demand. This is
fundamental in those markets where
speed and service are appreciated the
most.

 Lagging strategy: timing the

introduction of capacity so that
demand is always equal to or greater
than capacity (we follow the demand – purple line).
We increase demand only when we forecast it. It is adequate in those markets where price and
efficiency are appreciated.
Leading strategy Lagging strategy

Smoothing
Smoothing with the inventory means
using the excess capacity of one period to
produce inventory (in advance) which can
be used to supply the under capacity
period.
Hence, in this case we are able to
“increase” our production capacity thanks
to already existing stocks.

Filling products
Filling products are those products that are not
core for your company, that can be produced
because they have similar characteristics and
requirements (under a technological and a
competence viewpoint) of the ones already
produced and that are used in order to saturate
the not-used capacity.
The basic logic is: these products are sold in a
market in which the company can hardly be
competitive, and therefore this segment is used only for recovering fixed costs: the price set on
these products is covering (with a positive margin) only the variable costs.
The selling price for filling products must be higher (not a lot) than my variable costs in order to
help me in repaying my fixed costs.
You can sell these products in order to fulfill your capacity and reduce your fixed costs (an example
are the products sold at discount shops).
The utilization rate will remain the same because if I received an order from the normal market, I
would abandon immediately the filling products production to resume the normal production.
therefore, the only competitors of the filling product are the normal products.
Partially both leading and lagging capacity;
In order to be considered filling, a product has to respect three conditions:
o Technological compatibility (we don’t want to do other investments because of them the
price is set covering only variable costs, not the full cost!),
o The distribution channel used for filling products has not to interfere with the one dedicated to
core products (is not unusual that filling products are sold using a different brand),
o Production has to be easily stopped, and the company has no commitment towards the
market in continuing the supply.
The main market is more important and has the precedence on the filling products’ market that is
used only for influencing demand and saturating capacity.
Using filling products is like modifying the demand; it means that:
 It’s possible to influence demand  I can go and look for other business that I can exploit
 Not all the products are the same  the main products have the priority (filling products help
me just to reach i.e. the 60% of the production); but I can postpone only the not already
started batch of products.
 It’s useful to identify which products will be sacrificed in case the capacity is not enough 
which orders I will outsource, which cancel, which postpone…

Outsourcing
Sometimes, it’s possible to use external supplier to balance capacity and demand but you need to
take into account the risk that your outsource supplier might become your direct competitor.
This choice may appear easier than the reality in fact, we have to consider all the procurement
activities: we have to look for suppliers, contact them, negotiate with them and periodically
evaluate their performances.
Consider also that having a relationship with a
supplier is better than having an on-off
relationship, and conjoint investments and
Codesign might be really useful, in particular
under a strategic viewpoint; but of course this
will cause an higher exposure to risk (spillover
risk mainly).
Furthermore it is important to pay attention to
the fact that a supplier might learn how to
produce and might decide to enter the market,
becoming a new competitor.
Example: Samsung is used to be the component supplier of General electric and then, after some
years, it became a strong competitor of GE. On the right we have
Information are not certain
A factor that cannot be neglected when we talk
about “timing”” is uncertainty.
We have basically two sources of uncertainties:
o Errors in Demand Forecasting; it’s much
more useful to have a range (a confidence
level) than a precise forecast.
We define an interval in which the forecast
will be mostly placed (according to the
confidence level).
We will set an optimistic value (upper limit)
 the value forecasted has the 95% to not
to be exceeded and a pessimistic forecast
(lower limit) it has the 95% probability to be exceeded. My desire is that the actual value is
comprised in the forecasted range.
o The other information is the planned lead-time about Capacity Increment; it has to include
buffers for both foreseen and unforeseen events. The actual value could be shorter or longer;
obviously, I would that it is shorter than what I expected.

(a) Capacity on stream early but demand on

lower boundary of forecast  it means
that I can start producing before than
what I expected.
 In this case, I could start producing filling
products.
 Another solution could be to anticipate
the production but I will need to
negotiate the contract with suppliers
(asking them for more flexibility).

(b) Capacity on stream late and demand on

upper boundary of forecast
 Renegotiate the contract with supplier
but they will complain with us because it’s our fault and I will have to pay more suppliers or
penalties
 Anticipate production (or open more shifts – if possible), but this will also lead to more costs,
both related to inventories, energy, labor costs, etc.,
 Pay penalties.

In order to overcome this problem (at least partially), we have to perform sensitivity analysis that
can help me in understanding what may happen in different scenarios.
So we need to do a scenario analysis!
Scenery analysis
The scenario approach provides us the picture of what could happen i.e. all the combinations
between the forecasted demand and the planned lead-time. I have to understand which scenarios
will be more likely and which of them will bring us the best results or…
They are carried out in order to:
 To hasten possible constraints/opportunity
 To prepare countermeasure
 To limit the impact of not under control events
 To prepare a faster, more efficient and more effective response

The drawback of these analyses is that they have a high cost but obviously no risk no gain.

Size of the capacity increase:

Size of increase; elements to consider (there is not a best solution!)

 Economies of scale
 Demand uncertainty (stage during the life cycle)
 Financing availability (especially for small-medium firms  big units could be a solution)
 Over/ underutilization costs
 Outsourcing possibility

The timing of change

Usually, we focus on analyzing “as is” and “to be” stadiums, without considering than in the
middle there are a lot of things to be considered that can affect the situation.

Shouldice Case

1) What is Shouldice Clinic offering/selling on the market? What is the Outcome? What is the
Experience?
Holiday and socializing are essential to design a good experience. Customers can relax themselves
Experience Offers / selling Outcome
Holiday Hernia repairs Very low price
(time/recurring)
Socializing Shouldice method High customer satisfaction
Free medical checks Demand higher than offer
Employees satisfied  are
treated as internal customers
Healing from hernia
Quality is high ( measured
through  recurrent rate is
1/10 respect to the other
hospitals)
Speed 4 nights (the recovering
is fast); the shorter the time
the better it is
Delivery reliability (due to the
high level of standardization
and then repetitiveness of the
operations)
Very little flexibility

In their stay at the hospital. It is not considered as a hospital.

We could reduce the permanence of the patients at the hospital but it does not allow patients to
socialize with the others.

Structural (HW) Organizational /Process Managements

design /Org. structural design
Carpet Nurses (high salaries/ nicer Children accompanied by
jobs) parents (save nursery costs)
Stairs (little rise) MD (medical doctors)  they Matching people according to
don’t work during WE their interest to foster
socialization
Common rooms (TV rooms, pool Teamwork (No first women
table… among surgeons)
Canteen
Double rooms
Cost of operating room lower
respect to the average

What are the operational drivers that are referred to the elements on the table above?

This is not done overnight but it is the result of learning. It takes long time through the learning of
your operators.
The right person should be a doctor that doesn’t want to earn a lot of money, wants to stay with
the family….

Informal communication among the operating rooms is favorable with a horseshoe configuration
respect to the aligned configuration.
I want to select customers but if the segment that I chose is large, enough to satisfy my capacity is
perfect!
They select the customers upfront.
The nurse explains to patents what will be the procedures that will be undertaken during the
operation for both information and legal purpose. They design something more to relax potential
patents, actually previous patents receive new customers  customers are within the service
delivery.

 Should we increase capacity? Yes or Not? And How?

We have demand. Queue doesn’t mean that we need capacity. If the queues goes down we
will have an increasing demand (because some patients will decide to go to Shouldice hospital
because the queue is reasonable).
It’s better to not to open on Saturday/Sundays because in this way I will create discrimination
among doctors.
They didn’t manage operations well actually, if I will increase the capacity in terms of visit, I
should increase also the room capacity and the organizational one. I have to balance them
otherwise I will have bottlenecks within the system.
Two features:
 All the things that are structured and formalized are easy to replicate
 The training could be replicated but it’s not easy to give a rise to the same environment
that has generated life experience… It’s not possible do it with mass service!

 Does the competition is a threat for Shouldice?

Competitors don’t represent really a threat for Shouldice because they are not providing the
same service, they’re just providing the same operation but not all that is comprised with the
Shouldice hospital.
Shouldice could provide to the other hospitals a certificate in order to avoid false imitation and
to underline the real results of treatment.
Managing waiting lines- Part 1 Lesson 5 (Matteo Rossini)
A queuing system is formed by one or more “customers” waiting for a service by one or more
“servers”.

Why do queues form?

Queues form due to the not perfect counterbalance between the demand rate and the service
rate.
 Structural imbalance
 Incidental imbalance
 Variability
 Uncertainty

Some messages:

We can do a comparison between Lines and Stocks

Queues represent a particularly critical in the service companies; let us analyze how a queue
system is modelled:

Customer’s behaviors respect to queues:

 Balking
When a customer decides to not to enter a queue because it is already too long
 Reneging
When a customer already in queue gives up the service and goes away without being served
 Jockeing
When a customer shifts from one queue to another trying to shorten the waiting

Queuing system characteristics are:

 Calling population
 Arrival process
 Service process
 Queue configuration
 Queue discipline

Population
Customer’s population: it’s the input source
 Finite: if the potential number of new customers for the system is significantly affected by the
number of customers already in the system
(Ex: arriving to a copier share between three secretaries)
 Infinite: if the number of clients in the system does not affect the demand pace for the service
made by new customers
(Ex: people arriving at the ER)

Arrival process
The arrival process describes how customers show up. It’s
described by the distribution of interarrival times, that is by
the time interval occurring between two consecutive arrivals.
Arrival, negative exponential distribution

Look the following on exponential example:

Arrival, Poisson distribution

The Poisson distribution is in a one-to-one relationship with the exponential distribution. When
the interarrival time are exponential, the number of events N(t) that take place in a given time t is
a Poisson process. The Poisson distribution has a discrete probability function as:
Look the following example on the Poisson distribution:

T= 1 is (one hour)

We find that the probability to have ten

calls in the next hour is almost equal to
15%.

Remember:
We have to convert 5 min in terms of
hour (not just apply the formula) 
Don’t forget it!

As conclusion, we can say that the

relationship between the exponential
and Poisson distribution is the following:
The former describes the time that
occurs between two arrivals while the
latter represents the number of arrivals
within a certain time frame.
The time that elapses (intercorre)
between two Poisson Arrival is governed
by the negative exponential distribution.

Service process
The service process describes how each server delivers the service; in particular, it defines its
duration. It’s defined in terms of service times distributions.
… some numerical examples

We have a server who is the barman and a population given by the customers.
How to shape the system?

1 customer every 55 seconds will be served instead the arrival of each customer is every 55 sec.
Which parameters can be relevant?

System utilization rate: is the coefficient that describes the utilization degree of the system, where
s represents the number of servers present within the system.

𝜆
ρ= = (Utilization Rate)
𝜇
Answer to the following questions:
a) Assuming that Pierre is able to serve customers following a FCFS method, how much would
you expect to wait before you’ll have your drink in hand (Ws)?
b) How many people would you expect to find in line on average?
c) What is the probability that three or more people will be in the system?
d) What is the probability that you can be served immediately without none in line?
e) What is Pierre’s saturation? (how busy is he?)
To respond to these questions, we will exploit the following formulas:

Solutions will be:

Another example could be the following one:

 Which preliminary indications can we give to the
consultant base on these data?
We‘d say that to receive all the clients, we need at least
8,33 so 9 bank counters (sportelli bancari) open.
(Mu – Lambda is negative  come risolvo??)
This result doesn’t take into account the time constraint of the maximum waiting time in line of 15
minutes. Therefore, the number of counters is intended to increase.
Going further on our analysis, we will obtain:

Increasing by 1 the number of servers

from 9 to 10 (+11%) decreases the
throughput time of 60%!!

THE TREND IS NOT LINEAR

Waiting vs Saturation

 The waiting time does not

grow in a linear way with
the increase of the system
saturation time.
 Even with a system
utilization rate rather low
(around 60%) there will be
delays.
Actually, overcoming the 83% of saturation, the
waiting time will increase very quickly!
With the increase of the saturation level also the
queue length will grow.
The queue length is also affected in a negative way by
the variability that causes a further increase of the
queue length.

Therefore, the utilization of the waiting lines management is on 2 levels:

 System sizing and designing (ex. Consultant who needs to understand how many counters at
least have to be left open)
 Operative management, to evaluate costs and gains to improve the service (ex. Barman who
tries to understand how to make his customers more satisfied)
 Queue length
 Average waiting time in line
 Average waiting time in the system
 System utilization rate

Application to size the systems, achievable goals

 “Service quality” principles
 Average waiting time of the customer (banks, restaurants)

 Maximum waiting time (Public services like ambulance, fire brigade…

 Cost principles
Minimization of the sum of the wait and service costs (trade off)
Queue Configuration
We could have different queue configuration:

 Single queue: the best queue to minimize the waiting time

 Multiple queue: you can diversify the service; customer can chose the server he/she prefers
 Take a number: the customer can do what he/she wants in the waiting time
 Infinite servers
Single queue

PROS CONS
Assure a FCFs type of service It could “ scare the
customer”
Avoid concern that another
queue could be faster
Minimize the average
waiting time
Reneging actions are less
frequent

Multiple queue

PROS CONS
Allow to diversify the With the same numbers of
service servers, the average waiting
time is greater
Allow to diversify the work
Customer can chose a server
of his/her liking
Balking actions are less
frequent

Take a number
It’s a sort of variation of the single queue.

PROS
Assure a FCFS type of service
Avoid anxiety related to that
another queue could be
faster
CONS
An absent-minded customer
could risk to lose its turn
It could “ scare the
customer” (if he/she doesn’t
have anything else to do)
 Minimize the average
waiting time
Customers have the
possibility to relax and
dedicate themselves to
other things during the wait

Some driver of choice are:

 Service customization degree
If Customization is high best multiple queue

 Service times variability

If Variability and unpredictability is high  best single queue

Queue capacity

 Limited queue: the number of customers in line plus the ones that are being served is limited.
Customers who arrive after the capacity is overfilled are rejected.
 Unlimited queue: the number of customers in line plus the ones who are being served is
potentially unlimited.

Queue discipline
Queue discipline (or “ranking rule”) is the rule or set of rules with whom it’s established in what
order serve the customers, it’s often strictly related to the queue configuration.

Two types:

 Static: the pertaining order between the customers that are present doesn’t change in time
and/or at the changing of the system conditions (FCFS, SPT…)
 Dynamic: the pertaining order between the customers can change in time and/or at the
changing of the system conditions

 VEDI ESERCIZIO PAGINA 22/23 PERCHE’ NON SONO FORMULE DELL’ALTRA VOLTA PERCHE’ C’È
PIU’ DI UN SERVER QUINDI CAMBIANO LE FORMULE!!! (VEDI PDF QUEUEING THEORY
FORMULA)
Managing waiting lines- Part 2 Lesson 6 (Matteo Rossini)
What set of levers does the manager have to managing queue?

 Levers and counter measures demand side

 Levers and counter measures offer side
 Levers and counter measures for soft aspects/related to psychology of waiting
Service –Offer side

 Configuration changes
 Add/Remove/Move resources
 Decrease service time
 Technology utilization
 Training
 Increase resources flexibility
 Decrease service times variability
Arrivals- Demand side

 Decrease uncertainty level

 Booking
 Improve forecasts
 Decrease variance
 Incentives for non rush hours moments
 Booking
 Exploitation of the law of large numbers through “centralization”

Psychology of Waiting
Service laws
1. Satisfaction = Perception – Expectation  perception is more important than reality
2. It’s hard to play catch-up ball  firs impression is the most important
(to try to equal or surpass one's opponent in competition)

Prospect theory
(Tverksy and Kahneman, contemporary psychology)
Prospect theory distinguishes two phases
in the choice process: framing and
valuation.
In the framing phase, the decision maker
constructs a representation of the acts,
contingencies, and outcomes that are
relevant to the decision.
In the valuation phase, the decision maker assesses the value of each prospect and chooses
accordingly.

 Gain or loss perception depends on the benchmark (point of view)

 Loss sensitivity is greater than gain sensitivity

Psychology of waiting, waiting principles

 The unoccupied time seems longer than occupied time
 Pre-process wait seems longer than in-process wait  the customer has to feel as soon as
possible part of the “process”
 Anxiety makes the wait to look longer

 An unfair wait seems longer than a fair one

 The more the service is of value or the more the customer senses its
 utility, the more he/she is willing to wait
 Waiting alone seems longer than waiting in a group
 A customer exposed to an exaggerated wait will be a more difficult
 one to serve or an ex-customer

QUEUE SYSTEMS ANALYSIS TOOLS

The principle methods for queue systems analysis are:

 Deterministic analysis
 Queueing Theory
 Simulations (hints)

Deterministic analysis

 Pros
 Simple and intuitive to apply
 Cons
 Doesn’t take transitory into account
 Doesn’t take arrivals and service times variability into account
 Queue as an ON-OFF aspect
Queues theory

 Pros
 Takes interarrivals and service times variability into account
 Allows to calculate a set of significant variables (Wq, Lq, Pn etc..)
 Cons
 Doesn’t take transitory into account
 Mathematic analysis can become very complex or even intractable in case of complex
waiting lines
 Non Poissonian arrivals (non exponential service times/ customer complex behaviors
(balking…))
Simulations

 Pros
 Takes transitory into account
 Very flexible
o For the type of systems that can be shaped
o For the type of data that can be obtained (ex. times (%) that a specific customer waits
more than 1 minute)
o Economic and user friendly software are always more widespread

 Cons
 Time consuming
 Skills needed to design, production and analysis

Queues theory assumptions

 Stationary process (it is a restrictive constraint actually the arrival process isn’t a static process,
it changes during the day)
 Peculiar customers behaviors are not expected (no Balking, reneging and jockeying)
 True only for certain interarrivals and service times distributions

Kendall’s codification
Kendall's notation (or sometimes Kendall
notation) is the standard system used to
describe and classify a queueing node.
The red circled value are usually fixed (by
default) so the codification, usually consists
of 3 digits that represents A, B and c.
Queue and system…
A queue system is formed by 1 queue and one or more servers to offer the service. Therefore,
hypothesizing that arrivals and service rates are deployed as negative exponentials

Some models are:

 Standard M/M/1
 Finite-queue M/M/1 (M/M/1/K)
 Standard M/M/c
 Finite queue M/M/c (M/M/c/K)
 General Self Service M/G/∞

Example:
M/M/1
Population: endless or very big
Arrival process: interarrival times are described by a negative exponential
Queue configuration: single queue without capacity restrictions and balking or reneging effects
Queue discipline: single queue without capacity restrictions and balking or reneging effects
Service process: 1 servers with a negative exponential service times distribution

M/M/1/K
This kind of queue formally is the same as M/M/1 but in this case, the queue has a finite
dimension:
 Pn = probability to not enter in the system
 λ*Pn = expected number of lost customers
This model is particularly useful in estimating lost sales due to an inadequate waiting area or to an
excessive long queue

M/G/∞ (general self service)

It's a system with an endless number of servers or a system where customers serve themselves
(A possible example is the supermarket where, at least during the acquisition phase, customers do
not have to get in line)
The total number of customers in the process varies due to arrival and service time’s variability
(aleatorietà).
This model is also useful to shape, rounding situations where you rarely have to wait (ex.
emergency services).

Some examples - How to shape the following systems?

1. At a post office 5 postal clerks serve customers following this logic: the first free clerk serves
the next customer in line (There's space for 40 waiting customers at the top)
2. At the BuonaSpesa supermarket there are three cash counters. The firsts two serve customers
indistinctly, customers chose autonomously the line. The third cash counter is dedicated to
customers with 5 products in the bash at top. The supermarket capacity is not a restriction to
customers' possibility of getting in line.
3. From Milan - Linate airport, airplanes take off from the airport only strip

Numerical example:
In the firsts morning hours customers arrive at the post office where there's a single take a
number queue, at an average pace of 54 customers/hour (Poisson) while each servers can manage
to complete a service in an average time of 4 minutes (negative exponential).
a) If there are 6 servers at the counter: what is the average number of customers in the system,
the average waiting time in line and in the system?
b) Determine the smallest number of counters that need to be opened to keep the average time
in the system lower than 10 minutes
c) If an employee costs 30€/h and customer's waiting time stands for a cost of 20€/h for
customer, what would be the optimal number of servers according to purely economic
considerations?

…Solution
Given the the ρ and the
number of servers I can
compute the Lq using the
Lq TABLE
Another example is the following:
At a photocopier shop, customers usually enter to make copies or send a fax. Once they have
finished, they go to the cash counter to pay. The customers' arrival rate is 30 customers/h.
Of those, 2/3 enter to make copies while 1/3 to send fax. The arrival rates are distributed like a
Poissonian. On average, a customer takes 2 minutes at the photocopier; 4 minutes at the fax; 1
minute to pay.
Supposing that service rates are distributed like a negative exponential:
1. What is the probability that the shop is empty?
2. What is the system average throughput time?
3. How many people on average are in line at the cash counter?
4. How many customers on average are at the shop?
5. What is the probability to have less than 6 people in line at the photocopier?
6. What is the probability to have 1 customer at the shop?
This is how we could shape the system:
…Solution

1. What is the probability that the shop is empty?

2. What is the system average throughput time?

Photocopier: 1 / (1/2 -20/60)

Fax: 1 / (1/4 – 10/60)

Cash counter: 1 / (1 - 30/60)

3. How many people on average are in the line at the cash counter?

(1/2 *30) / (60 -30) = 1/2

4. How many customers on average are at the shop?

5. What is the probability to have less than 6 people in line at the photocopier?

6. What is the probability to have 1 customer at the shop?

… some messages from queue system shaping:

 A complex system is the composition of more elemental sub-systems that interact among
themselves (mapping the system and identifying every step of the process).
 Very often in a complex system transit different type of customers (knowing in advance every
types of customers of one own system).
 The system expected throughput time is a representation of an "average" customer and not of
the specific one!
 The throughput time varies according to the variation of the work load in the systems and at
the variation of the input.
 Nodes Balancing to flows calculation

 Node Balancing
Everything that enters in the node is equal to everything
that comes out from it. Nothing is created or destroyed!

 The flow in the system (line + server)

Everything that enters in the system is equal to
everything that comes out. In the system, there isn’t
any flow loss (the service process works on customers,
without creating nor destroying any!).

Considering the following example:

The system can be shaped in this way:

These two equations

are referred to the red
node (what comes out
from the red node).
Rinascimento clinic (example)

The system average throughput time is

around 25 minutes. But the patients
complain of a very variable time and the
reason behind it it’s not clear.
Time varies from less than 5 minutes to
more than 45!

Customers’ complaints risks to damage the center image and to make it losing customers.
Knowing this issue, a specific analysis of the process is necessary to comprehend the causes of
variability.

 Each process is characterized by a certain patients' arrival rate and a certain service capacity.
Both parameters influence queue length and throughput times!  Know the system
 The system is formed by different entities (different type of patients) who have different
behaviors and paths  Identify different typology/families

Wq, Ws, Tempo di inattività

 Ws is given by the sum of Wq and service time

 Why does it simultaneously exist an average wait time and a server’s inactivity time?
We have to consider 3 different (types of customers/) types of path in the system:
1) Reception  Doctor carter
2) Reception  Doctor carter  Doctor Romano
3) Reception  Doctor Romano

Expected throughput time  weighted sum of the average throughput times for each type of
product (it is like the average time waiting in the system by the customer)

Expected throughput time, messages:

 The system expected throughput time refers to an "average product". It doesn't have to be
taken as an absolute benchmark
 It's crucial to know the system and to map it: which phases? Which products? Which
problems?
 For each type of product the variability is much lower: it is explained a part of the initial
uncertainty
 If it's possible to assign the type of product at the beginning of the process, the uncertainty
decreases and it's possible to better align performances to expectations, therefore it's possible
to start effective countermeasures

M/M/1 system with assigned priority to a customers' class

It’s a system formed by just one server who is able to serve two classes of customers (1 and 2) that
have a different service admission.
Hp: customers of class 1 have a service admission priority higher than customers of class 2
We will consider the following cases:
 Preemptive priority (in general terms, it means that I can interrupt an activity that is already
started and start a new one, later I will resume the previous activity)
 Non preemptive priority
Preemptive priority
If a customer of class 1 enters the system while a customer of class 2 is being served, the service to
the customer of class 2 is interrupted in order to give immediate to the customer of class 1.

Following formulas allow calculating the system throughput time (E =Ws = throughput time) of the
classes of customers:

Example:

Non Preemptive priority

If a customer of class 1 enters the system while a customer of class 2 is being served, the service to
the customer of class 2 is terminated and only then the customer of class 1 is taken care of.
Following formulas allow to calculate the system throughput time of the two classes of customers

Example:
If we analyzed again the Rinascimento medical center with priority; we will obtain the following
result:

Class with higher priority. Customers arriving from doc. Carter

Class with lower priority: customers arriving from the reception

The alteration of the priority logic doesn’t change the system expected throughput time
However, in some cases it’s essential to increase the customer’s satisfaction level and to improve
customer’s service.

Service Concept and Managing Capacity and Demand and - Lesson 7

(Portioli)

SERVICE CONCEPT

The service concept defines the how and the what of service design, and helps mediate between
customer needs and an organization’s strategic intent. We define the service concept and describe
how it can be used to enhance a variety of service design processes.
When we present an idea, we mostly focus on what we do and what we offer to the customer – the
outcome.
We have to consider also the customer’s perspective and the impacts it will have.
The service concept aims at aligning the system towards the inside and towards the outside. Aligning
the goal is crucial because the process is not totally controlled.
The service concept is what you design in order to make clearer what the service is about (the
deliver). In fact, there is a gap between how the company would like the service to be perceived by
clients, employees and stakeholders and how clients, employees and stakeholders see the service.

The service concept is made of:

 Organizing idea: the essence of service brought to or used by the customer.
It is considered as a wonderful alignment tool for employees, and for customers, a guideline for
all choices or a continuous reinforce of the competitive differentiation of the service offered.

 Service provided: it is about the processes to deliver the service, its output and the service
delivery system.

 Service received: difference between the Output of the process (service delivery system) and the
Outcome (received by the customer); in fact, the outcome of the process (what is received by
the customers) is not the output (service delivery system);
o Designing the experience:
▪ Customization of the process,
▪ Response speed (of the delivery system),
▪ Employee’s flexibility,
▪ Intimacy with the customer,
▪ Accessibility of the personnel,
▪ Perception of being valuable,
▪ Curtesy and competence.

The Service Profit Chain

It is important to understand which service we’re delivering to the customer, because it gives the
value to what we do. If the customer is satisfied, it will be loyal!
Customer Value Equation
The customer value is made of an outcome and an experience, and we have to be able to distinguish
between these two elements
CustV = Outcome (results for the customer) + Experience
Then, we have to compare it with:
Price (for the customer) + Acquisition cost

Focusing on Value for the customers require:

• Understanding the customer’s needs and service opportunities,
• Selecting customers,
• Developing focused service packages,
• Managing expectations.

Successful companies do it continuously and their key elements are employees and operations
systems.

Customer’s loyalty and focusing on keeping customers.

Many measures of customer retention and customer loyalty are focused on past analysis more than
finding elements to ensure customers’ future loyalty.
Surprisingly, there is more attention on finding new customers than keeping those ones already
engaged, as if customers were inalienable (customer retention vs. customer renewal).
We have to consider the customers’ lifetime value, so how much value they could bring to us.
Remember that customers compare expectations and perceptions!
We can manage expectations through Sales & Marketing functions. Sometimes, it could be wise to
lower the expectations because we have to meet them!
The most important thing is to satisfy the customers therefore, we want to align perceptions and
expectations.

What I want to avoid is the

existence of a gap between
the customers’ expectations
and the service and between
the service and the
customers’ perceptions
because it will make me
loosing customers.
So, we can decide to map all the interactions and processes using a tool similar to a control chart,
in which we can highlight a tolerance zone and monitor customers’ satisfaction:

MANAGING CAPACITY AND DEMAND

Aligning capacity and demand

Furthermore, being that services are not storable, we have to be able to align capacity and demand.

Demand management

• Demand segmentation
You rarely serve only one single market segment.
Customers’ needs and behavior are often different.
Proper data analysis allows us to identify opportunities for segmentation, differentiating the
service and thus improving performances.
• Fix price incentives
In periods of low demand lower prices will be offered. This will move price sensitive
customers to periods when demand is lower, thus leveling the request.
 E.g. train operators make ticket prices that are differentiated by day of the week and time
• Promote demand in low season
Looking for other services to be offered.
• Development of complementary services
Complementary to do more and better business,
Complementary for synergies/pairing,
Complementary for seasonality.
• Development of reservation system
With a reservation you almost have an early sale. The advantages are significant for
customers (reserved seat, welcome, …)

Capacity management
• Increase customer participation
When demand increases, also capacity increases: therefore fewer resources are needed to
deal with increase in demand.
The degree of customer participation can be varied according to demand.
• Make a part of the capacity variable
Flexibility solutions with outsourcing.
First class – economy distribution  the difference is only in the service, no more on the
hardware. This is very important because you can adapt it according to the demand.
• Capacity sharing
Some airlines make their own aircrafts available to other companies, at times of low demand
(changing the fuselage decorations);
Multi property apartments,
Sharing of resources between branches.
• Employees cross-training
Having some operators with extensive expertise allows to answer local peaks of demand for
specific activities (supermarket, bank…). So, in this way I can move people from a dept. to
another because they have wide competences and are more flexible. The most difficult
aspect is how to train people to do more than one job.
• Use of part-time employees
If variability is predictable enough you can use part-time staff.
In Italy, part-time is still used very little compared to other European countries but it has
great potential.
Ex: These graphs show the arrivals of calls to a call center. What we have to do is to match them
with the capacity.

Daily shifts scheduling:

o Demand forecast,
o Calculate the needs of operators (limit is on the level service, and queuing theory),
o Identify the types of possible shifts (national contracts, union agreements),
o Shifts scheduling (e.g. minimize 𝑋𝑖 ),
o Assign people to shifts.

Scheduling weekly shifts with rest days:

o Define the type of shift to implement (eg. 5 days working followed by 2 of rest),
o Model the problem with Integer Linear Programming (ILP),
o Solve the ILP problem,
o Assign people to shifts.

We want to minimize the overall

number of shifts.
We have some constraints.
QUEUE EXERCISES - Lesson 8 (Mattia Rossini)
Look the exercise book:
 Ex 1 Rinascimento Clinic
 Ex 2 Sterilization centre

QUEUE EXERCISES - Lesson 9 (Mattia Rossini)

 Ex 3 Verdi Spa

System Physics - Lesson 10 (Alberto Portioli)

Production Capacity
 It’s possible to measure it in different ways and to focus on different levels (single resource,
department, company)
 At single resource level, the fundamental element is theoretic capacity (eg. Unit/hour).
Theoretic capacity refers to the conditions when everything goes well.
 Eg. Unit cycle time: 6 min, theorethic capacity: 10 unit/hour
 To determine the actual capacity, it’s necessary to also take into account other factors…

Availability
It is about human resource availability and the fact that workers, for some different reasons, are
not always available or cannot work.
 A resource may be not available to produce
 Part of working time during which the resource is available for working is named Availability.
Its symbol is A.
 Causes for unavailability can be:
• Breakdowns
• Interruptions (for problems, of for calls)
Actual Capacity = Ct * A
For example, if availability is 80%, a resource with a theoretic capacity of 10 units/hour, in the
mid/long term will produce only 8 units/hour

Serial System

Cycle time is the time needed to process a unit. Each unit passes through all the phases.
Even if we have stocks, it won’t change anything.
What is the capacity of the system?
Capacity is limited by the slowest phase  C/T = 6 and the hourly capacity will be equal to 10 u/h

Decoupled Serial System

System capacity is 10 u/h.

Queues between each phase do not balance out different C/T.
Of course, we have to remember that Availability can negatively affect system capacity

Looking the example above we can observe that, given the availability values, the system capacity
is now equal to 8,4 u/h (the phases are decoupled to each other and the system capacity is given
by the product between the C/T phase and its own availability). Availability can also change the
bottleneck as in our example.

Coupled Serial System

Queues disappear.

In this case, System availability is the product of the single

availabilities: A = A1 * A2 * A3 = 0,5
Capacity is therefore 60*0,5/6 = 5 u/h (it is different from
the previous case because in this case the phases are not
decoupled hence before I will compute the overall availability and then I will multiply it for the high
cycle time)
Coupled Serial System (line)

System C/T is the largest C/T.

System availability is the product of different availabilities
A = A1*A2*A3 = 0,5

Adding queues

Fixing some buffers (with stocks) among the

different phases I will be able to increase the
hourly production capacity from 5u/h to 8,4
u/h.

It seems like queues/stocks bring an improvement, but it’s not true: they are just an increase of
waste.

Ideal coupled Serial System

Capacity = 60/5 =12u/h  +43% on queue system

The Real solution is to remove wastes

To increase availability you can invest more on maintenance but of course, it represents a cost.

Set-ups and system flexibility:

 The system works 8 hours/day and daily demand is 60 units (constant in volume).
 The system has a range variety of 10 products, and they are all requested every day
 Are there any problems in delivering to order the requested quantities?
(I have to produce stocks or I can produce with orders?)

 Tp: Time to produce ACTUAL CYCLE TIME

Tp = Average demand (pc / day) * (C/T) / A

 Tsu: Time to Set-up
Tsu = Number of set-ups (set-up/day) * C/O [C/O  change over = set up time]
• Ta: Available daily time

Productivity’s feasibility analysis:

Tp + Tsu = 60*6/0,9 + 10*10 = 500 minutes (sum of production time and set up time)
Time Available Ta = 480 minutes
Considering the results we have obtained before the company won’t be able to satisfy the market
demand in make to order..
Thus, it has to intervene in order not to lose profits!

What can be done?

BATCHING

 In order to have more time to produce, companies usually batch production of each single
product (why??)
 That implies:
 Advance of unrequested production
 Having interoperantional/finished products stocks
 Increase of system response times
 Increase of throughput time variability, system congestion and coordination needs

 Quantity Batching defines the exact (sometimes minimum) quantity to produce every time a
product is to be produced
 Time Batching, defines the times a product is produced over a defined time horizon (e.g.
once/week)
 If Time batching is used and each product is realized every two days (5 different products/day:
because one day I will produce the first five products and the day after the remaining ones)
 But you have to renegotiate the contracts with your suppliers!
Tp + Tsu: 6/0,9*60 + 5*10 = 450 minutes
Ta = 480 minutes

Batching problems:

 There are stocks (need for space, costs increase...)

 Production in advance of demand not yet requested!
 Risk to keep stocks of not requested units! (for example, when demand has variability)
 Flexibility decreases (if today code F is requested and it is not in stock nor scheduled for
today’s production, it could be produced only adding a rush order that creates inefficiency)
 Increase coordination and supervision needs in production process
Batching vs reducing set up times
 Batching is THE way companies adopt, even if it entails some disadvantages and it’s NOT FOR
FREE!
 It’s a lot better to pursue the reduction of set up times!!
(reducing set up time from 10 to 8 minutes, it’s possible to produce every day each product in the
requested quantity!)
Set-up and system flexibility
 The following stocks decoupled system operates 8 hours per day and has a daily demand of 60
units (constant in volume). What is the minimum batching for each of the 3 phases?
 The system has a range variety of 10 different products that are requested every day. Each
machine produces 10 different products (with set up at every product change).

Minimum batching (decoupled system)

 To calculate the minimum batching, it’s necessary to understand how many sets up can be
done in each phase every day.

Phase 1: number of sets up per day?

6/0,9*60 + X*10 min = 480 minutes  8 set-up per day  (production time + set up time =
availability time).
The average batch quantity for each product is 60/8 = 7,5 units.

Phase 2: 4/0,8*60 + X*15 = 480 minutes  12 set-up per day (if orders are grouped per day, there
is no need to produce more than the ordered quantity)

Phase 3: no constraints on the batch

Serial Coupled System
 The following stocks decoupled system operates 8 hours per day and has a daily demand of 60
units (constant in volume).What is the minimum batching for each of the 3 phases?
 The system has a range variety of 10 different products that are requested every day. Each
machine produces 10 different products (with set up at every product change).

Minimum batching (Serial Coupled System)

 The system is coupled.
 If a phase stops for set up, so do the others.
 It’s therefore important to understand how much time the line is stopped to make set-ups
(total time of stop for the line is the total time of stop for set-ups)

 In this case, for each product change corresponds a set up at each phase, when a phase does
the set up, so do the others.

The time for a set up is 15 minutes (longest set up time, if setups are performed in parallel. It is the
sum of setup time if setups are performed sequentially. E.g. by one single person)
System’s Cycle time is 6 minutes System’s availability is 85,5%. Therefore:
6/0,855*60 + 15*X = 480  about 4 set-ups per day
MINIMUM AVERAGE BATCH: 15 units (that is 2,5 days of customer’s demand for each code 
6*2,5)
NEW PART 
Example 2
Daily demand 60 units/d (constant in volume), time available for production 8 hours/d and variety
10 different finished products (each one is requested every day):

 There are five products types at phase 1

 At phase 2 there is a further differentiation leading to 10 different product types
In each stage, we have an operator dedicated so we can do set up in parallel!!
What is the minimum batching of the system (coupled)?
What would it be the minimum batching of the system if de-coupled?

In the system:
 5 sets-up at phase 1
 10 sets-up at phase 2
 How much is the stop time for the line because of sets up?

The average time to change from a finished product type to another (AST): 8,5 minutes
Cycle time: 6 minutes
Total availability: 85,5%
6/0,855*60 + 8,5*X = 480  around 7 sets-up per day
MINIMUM AVERAGE BATCH: 8,6 units (that correspond to the average demand of 1.43 days for
each type of finished products); if I will produce more than 8,6 I will increase my stocks and of
course, if I decreased the number of the units I will decrease the number of batch too.
If I have a lower set up time I can produce batches of lower size and the risk to trash out my
products will be lower. Actually, after some time the market could stop buying my products.
The stocks help to satisfy the market demand but they don’t improve the system performance!

Set- up (flexibility)

 Production change (change of product) requires set up.

 The longer the set up time is, the less frequent the production changes will be
 The longer the set up time is, the greater the risk of producing something that is not requested
will be
 This has obviously impacts on performances, increases costs (stocks, necessity of
coordination..), increases throughput times variability and decreases system flexibility
Production capacity

 Theoretic production capacity indicates the number of products realized in the time unit that
the resource is able to produce under optimal conditions.
 Availability takes into consideration resource’s stops that decrease the theoretic production
capacity
 Sets up decrease the time available for production and system flexibility. Batching is used to
increase single resources’ efficiency but it creates problems at a system level

COUPLED VS DECOUPLED SYSTEM

 A system decoupled by stocks allows making production phases more independent, but it’s a
system that requires stocks to work, thus showing that is a system with problems.
 A serial coupled system links the production phases. This highlights problems and allows
seeing them and addressing them.
 The objective is to remove problems (remove the causes of the problems), so that the system
improves.

Yield Management Part 1- Lesson 10 (Alberto Portioli)

Definition: Yield management is a variable pricing strategy, based on understanding, anticipating
and influencing consumer behavior in order to maximize revenue or profits from a fixed, perishable
resource (such as airline seats or hotel room reservations or advertising inventory).
Yield management exploits the information on customers’ behavior that Operations get while
delivering the service, so to improve competitiveness of the company.
I have to sell top prices to those customers that are willing to pay them and lower prices to the
others (actually, this process can result similar Price Discrimination) in order to sell all the products
that I have. Anyhow, I have to be careful to avoid the cannibalization phenomenon otherwise I
could compromise my revenue stream.
To limit cannibalization I have to allocate in the right way my capacity to the different classes
(avoiding under or overestimation of the demand) and exploiting Service diversification. To do it
informative system and allocation model are fundamental to keep track and determine rates and
allocation.
We can say that Yield management acts in an integrated way on demand and capacity in order to
“Sell the right capacity, to the right customer, at the right time at the right price” so to Maximize
Profits.
Main traits of Yield Management:
 Y.M. systems refer to strategies and tactics used by a certain number of companies to manage
the allocation of their capacity to different rate’s classes in order to maximize their profitability
 Main objective is to maximize the capacity utilization rate in order to reach an objective in
terms of profitability that is as close as possible to the potential target of maximum
profitability
 Therefore, Y.M. is a systematic approach to maximize profitability by offering prices
differentiation to potential clients
Application fields are constantly increasing.
The main industries that adopt yield management are:
 Transport (airline companies, naval transportation, railway companies, rent a car companies…)
 Entertainment (tour operators, cruise boat. Golf course, Movie theater, Advertising)
 Hotels, restaurants…

The ideal characteristics of Yield Management are:

 Fixed Capacity
 Ability to Segment Markets
 Same capacity for different Market segments (same service to different customers at different
prices. The product/service could be exactly the same or slight differences made at the last
stages of the production process  Example: Business ticket, economy ticket…)
 Perishable Inventory
 Product Booked/Sold in Advance
 Fluctuating Demand
 Uncertain Demand
 Low Marginal Sales Cost and High fixed costs (variable costs are low fixed costs are high)
 High Capacity Change Cost

The Possible processes

There are mainly 4 types of process:

In the last case, we have all the phases together.

(recovering examples!!)
Yield management tools:
 Capacity allocation
 Price policies
 Demand forecast
 Protection policies  we have a certain capacity and two fares (normal and discounted); I
have to decide how many seats reserved for full price customers and the remaining will be
sold at a discounted price.
 Overbooking
E.g. selling more seats than my capacity knowing that a percentage of customers won’t attend
the flight.

Capacity allocation and market segmentation (rif. situation 3)

Now we can consider the following model:

My objective function has the aim to maximize
the sum of the margin!
Two constraints  capacity constraints!!
The first constraint: the amount of units reserved
for customers of class j has to be lower or equal
to the number of people of class j.
The second constraint: the amount of units
considering all the classes has to be equal or at
maximum equal to the Overall capacity of the
company.
The huge problem lies in the fact I don’t have these data so I need to forecast them.
We have to forecast all these numbers in advance! Knowing the willingness of my customers, I will
be able to protect the capacity for each class of customers (we do not want to sell all the tickets at
a discounted price otherwise, we will lose profit –> We want Price Discrimination).

Capacity allocation and Demand Forecasting

To forecast the demand we can exploit some software but they are empty box! The real value in
the software are the data you collect (think of Shouldice Hospital  they continue to
experimenting and see the results of their actions). Our ability is to find patterns (cluster of
customers). This is the reason behind fidelity cards, they are huge collection about consumer’s
data. Doing it, you provide information to the operators in terms of personal consumption
features but also the way we consume!
 Data:
 High detailed level (origin, destination, rates, day of the week, timetable)
 Quantities to keep track:
o Demand per each categories/rate/period
o Demand elasticity
 Forecast difficulties:
 Seasonality, Trend, Special events, Competitors actions, Small variations in a variable can
have large effects on others.

Protection level sizing

X1 and X2 are the demand quantities.
After a certain period, the discounted price
tickets are finished and you have only full
price seats.
 Capacity allocation: objective is to
determine the quantity of capacity
dedicate to full price paying customers.
The Yield Management Game
Situation:
 It’s possible to classify clients into clients willing to pay full price and clients willing to pay
discounted price (simplification: only two categories)
 Potential clients come from different sale channels and therefore the revenues are different
for the Hotel
 Not all who have booked will actually show up (No-Show)
Goal: profit maximization for the hotel you work for.
If I overbooked, I will not earn because they do not pay me for a service they don’t use but
moreover I will have to give some money to them so I will lose money (Walking Costs 
reimbursement).
Decisions:
 Define how much capacity you want to protect
 Define how much overbooking you want to have
 Define a guideline to decide which requests you will accept and which one you will refuse
 For each request, you have to accept it all, or refuse it all

20 % of all the
requests

LOOK EXERCISE BOOK!!!

It’s very dangerous to refuse full price customers

REVENUES WALKING COSTS Results = Rev -WC Filling rate Protected

30 – 40 K
41-51 K 78% 43
50-60
50-55 K
55 -60 K
 61 -65 K 97 %
66 – 70 K

With different filling rate, you can have the same results or vice versa.

Yield Management Part 2 - Lesson 10 (Alberto Portioli)

Protection level definition:

 Marginal Analysis
 Heuristic Expected marginal Seat Revenue (EMSR)

Marginal Analysis Approach

 X1 = demand for full price unit

 CU = cost to underestimate the demand of a full price unit (the cost to underestimate…it is the
difference between the full price - the discounted price  because I have sold rooms at
cheaper prices respect the full price (1100 – 300 = 800))
 CO = cost to overestimate the demand of a full price unit (my cost is 300 because I could have
sold more rooms at cheaper price)
Balance between underestimate expected cost and overestimate expected cost.

In our game:
A few messages
 It would be possible to saturate the hotel selling all rooms at a reduced rate. In this way,
however, the profit would not be maximized. Should therefore bear a risk against a
potentiality superior margin.
 The uncertainty and variability must be managed: overbooking and risk on the fixing of the
protection level.
 Having information on the past history is essential to set a yield management system, as well
as having good demand forecasts. The information system is central to the success of this
management approach.
 The ability to segment effectively the different types of customer and know in advance is a
crucial point, which the operations are to exploit (e.g. Customers of Japanese nationality
usually do less no show than customer of Italian nationality).
 It’s important to pay a lot of attention to choice of prices

Few elements to segment the demand

Some elements of segmentation to avoid cannibalization of rates
 Restrictions on the purchase
 Delete option
 Number of units
 Purchase volume
 Single purchase vs buying group
 Duration of use
 Stay 1 day vs weekly stay (hotels protect rooms for long staying customers so you can ask
for a room for just a week end also six months ago but they replied to you that no rooms
are available also if it is not true because in this way they will lose the opportunity to rent it
to a longer customer’s reservations)
 Customer “Value”

 Protection level is used for all cases when you want to protect some capacity for more
profitable customers, which will probably arrive later on.

Recap:
 What is the yield management and some examples
 Which sectors/what features are needed in order to successfully exploit the yield management
 We have seen that the variability and uncertainty about the different customers classes of the
system require tools and techniques specifically for:
 Define how to allocate capacity to the different classes of customers identified by defining
the protection level
 Define how many reservations or sales to accept more than the capacity  we must
deepen, next scheme
The problem

 There is uncertainty and variability on total demand expected and anticipated demand for
each class of customers
 How many bookings or sales do you accept against a certain known production capacity?

Overbooking
Overbooking can be used in two situations:

 Overbooking, due to the fact that not all bookings become a sale
 Overbooking of sold tickets over capacity (overselling), due to the fact that not all the ones
who bought the ticket then use the service.

Considering this picture, we

realize that we have to
protect ourselves from both
booking that do not
purchase and from purchase
that do not come to use the
service.
The only way to do it is to try
to estimate the number of
units that fall into these
classes.

Therefore, Overbooking can be applied in reference to 2 decision points (Two moments):

 Overbooking on the number of reservations: accept a number of reservations higher than

the service that is able to provide
 In order to protect themselves from the reservations that do not turn into purchases

 Overbooking on the sales: selling a number of units that is bigger than actual capacity
 In order to protect from the effects of no show

 The application of the types of overbooking depend on the process followed by the each
services company
 In the following we will refer to process type 3, but it is valid also for process type 2 and, if
applied in sequence, also to process type 1
We can consider two classes of method in order to evaluate Overbooking:
 Analysis on the mean values
 Analysis with calculation paper Static
 Marginal analysis
method
 Setting the level of service (not YM)

 Dynamic overbooking

Average values approach

Pros

 Easy to understand and to implement

Cons

 Does not take into consideration costs

Overbooking brute force approach

 CU = Cost an empty room (“spoilage cost”)

 CO = Walking cost (500$)
I have to choose the value for which the expected cost is lower!
The problem of this approach is the confidence on data  it is very difficult to have reliable data
on the probability! (almost impossible) the drawback of this model are the input data (if
probabilities are bad computed we will have rubbish in  rubbish out)
Pros

 Easy to use
 It considers opportunity costs
Cons

 It does not make easy to understand the underlying logic

 Data on probability of no-show are not reliable

Overbooking with fixed service level

 You want to set the level of service to be provided to customers (put a limit to the probability
of “walking”)
 It’s not YM technique

Overbooking: marginal approach

We continue to accept reservations until the expected margin on the last booking accepted is
greater than or equal to the expected loss on the last booking.

 CU = unit cost to underestimate the real demand

 CO = unit cost to overestimate the real demand

- Ovb = overbooking
- NS = No show
In the game

In reality, overbooking costs are not linear

Difficulty in the implementation of YM systems

 Customer’s reaction
 Difficulty to understanding
 Attempts to fool the system
 Conflicts of objectives among different business areas
 Cost/Time implementation
 Cost of the information system
 Difficulties/time/cost in data collection
Heuristic EMSR (Expected Marginal Seat Revenue)

Fix the level of protection for each of the classes / rates

Where…
EMSR … AN EXAMPLE

Determine the protection level for classes 1 and 2.

Protection level for classes 1 and 2 together

There’s no protection level for the most economic rate